Capital gains change on the cards?

There is growing speculation that 2021 will be the year that Chancellor Rishi Sunak hikes capital gains tax (GCT) rates.

He is said to be considering proposals made by the Office of Tax Simplification (OTS) earlier this year to overhaul the system.

CGT is charged on the profit when a person sells an asset that has risen in value.

The aim of the changes, which could be introduced in the Budget next year, would be to bring the rates paid closer in line with those of income tax.

At the moment GCT for most taxable assets is charged at 10 per cent and 20 per cent. For residential properties that are not a main home that rises to 18 per cent and 20 per cent.

In comparison income tax rates stand at either 20 per cent, 40 per cent or 45 per cent.

According to reports, reducing exemptions and doubling CGT rates would bring in an extra £14bn to the Treasury as it looks to meet the continuing challenges of the Covid-19 pandemic.

The speculation has led to a rise in CGT receipts this year, which some experts believe has been sparked by people selling their assets ahead of any hike.

The amount received by the Treasury increased from £4m in October 2019, to £72m in the same month this year, according to official figures.

The Chancellor asked the OTS to “identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.”

In its report, published in November, the OTS set out a framework of policies the government could consider to simply the tax, “smooth out bigger picture distortions”, improve administrative efficiency and make CGT easier to understand and predict.

It said that the disparity in rates between CGT and income tax could “distort business and family decision-making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains”.

Bill Dodwell, OTS tax director said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning Capital Gains Tax rates with Income Tax rates, or addressing boundary issues as between Capital Gains Tax and Income Tax.”

The report also said that CGT incentivised owners to transfer business and personal assets to others on death rather than during their lifetime.

It added: “This may not be best for the business, the individuals or families involved, or the wider economy.”

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